San Diego’s bankruptcy debate mirrored in South

MUNICIPAL BANKRUPTCY

Requirement: The city must be insolvent and unable to agree to deals with creditors.

How it works: The city would likely hire an outside legal team to handle the case. A reorganization plan would be developed by the city that would get finances out of the red. It would likely include what is called “shared sacrifice” under which creditors would get some but not all of the money owed. In many cases, creditors agree to terms with the city to ensure they don’t lose all of what is owed. A judge would decide disputes between the city and a creditor.

What won’t happen: The city can’t be forced to liquidate assets and the judge is prohibited from interfering with the city’s day-to-day business.

City leaders approve significant pay and benefit increases for workers without identifying a way to pay for them. A mayor leaves office under duress. A switch to a strong-mayor form of government. A crushing pension deficit that threatens to overwhelm city finances.

All of the above describe the city of San Diego’s fiscal crisis, but they also describe the circumstances that befell Prichard, a suburb of Mobile, Ala.

The end of Prichard’s tale hasn’t yet been written although the city has filed for bankruptcy twice in a 10-year period. The city’s latest move is of particular interest to some in San Diego because Prichard officials are trying to do something that has never been done anywhere in the United States: Reduce vested pension benefits through municipal bankruptcy.

Nearly every article written about San Diego’s pension woes leads at least a few readers to question why the city doesn’t declare bankruptcy and strip workers of benefits that many residents consider to be too generous. The city’s elected officials, including Mayor Jerry Sanders and City Attorney Jan Goldsmith, have repeatedly responded to such queries by noting that no other municipality has successfully reduced its pension debt through bankruptcy.

Prichard could change that.

The city of 28,000 residents filed for Chapter 9 bankruptcy last year because it couldn’t afford the $190,000 monthly payment for the pensions of its retired workers. The retirees — who have sued the city — haven’t been paid since September 2009 and are owed more than $1 million.

As part of its bankruptcy filing, the city offered $200 monthly checks to its pensioners, an 85 percent reduction from what they were promised. A judge dismissed the bankruptcy case in August because of a technicality in state law, but it is expected to be refiled soon.

San Diego’s pension mess is much worse. The city has a $2.1 billion pension deficit that emerged after benefit hikes in 1996 and 2002 and ballooned during the nationwide recession.

There’s currently no political will at City Hall to declare bankruptcy, but advocates for a Chapter 9 reorganization say it may be the only way for the city to move forward with a healthy financial outlook. The alternative — and current status quo — is to continue cutting costs by slashing spending on parks, libraries and public safety.